Introduction to Cryptoeconomics [Cryptoeconomics 101]

Some history on Cryptoeconomics

Although the origin of the word is unknown, it has been heavily promoted and referred to by Vitalik Buterin, the co-developer of Ethereum and several other participants of the blockchain ecosystem. Over the past several years, Buterin has continued to expand the scope of Cryptoeconomics to examine mostly game theoretical use with respect to the development of cryptocurrencies. Buterin examines Cryptoeconomics through the use of 1) Game Theory and 2) Cryptography.

Firstly, cryptoeconomics draws heavily on microeconomics, game theory and applied cryptography. Although, current users of cryptoeconomics regularly refer real implementations (see Bitcoin and Ethereum Foundation) such as hard forks and soft forks in cryptocurrencies. Current progress thus can be explained by fields within computer sciences and game theory.

On 19 August, Josh Stark of Ledger and Blockgeek Labs proposed that cryptoeconomics is the focused study of economic incentives within blockchain. Stark (2017), “Cryptoeconomics is not a subfield of economics, but rather an area of applied cryptography that takes economic incentives and economic theory into account.”

Additionally, Stark (2017) shared an extremely strong reason as to why cryptoeconomics is for the “Economics is the study of choice: how people and groups of people respond to incentives. The invention of cryptocurrency and blockchain technology does not require a new theory of human choice – the humans haven’t changed. Cryptoeconomics is not the application of macroeconomic and microeconomic theory to cryptocurrency or token markets.”

I agree with Stark’s point. However, there are certain points that seem to contradict the use of economics in applied cryptography. Cryptoeconomics through applied cryptography in the current context is simply an occurrence under macro and microeconomic variables. At the micro-level, the evaluation of incentives between agents remains to be examined with existing microeconomic theory.

This is the true point for Cryptoeconomics. With the application of blockchain [or its newer variants] information asymmetry is expected to face downward pressure. Full implementation of blockchain will reduce information asymmetry and depress it below any expected equilibrium [think shifts of the general equilibirum]. Think application of blockchain in the real economy for identity verification. Current microeconomic theory cannot account for the reduction of information asymmetry. Simply put, in perfect information, nearly all of the current literature in Economics could face revision.

Basic Definitions of Cryptoeconomics

To this end, I expand on the definition of the field of cryptoeconomics.

Cryptoeconomics is the study of a technological framework that appropriates goods and services in the real economy. In this framework economic intelligence and economic agents intervene when necessary. The source of this intervention can be attributed to the non-appropriation of profits/negative externality caused by economic intelligence or agents that are participants of a representative framework/society that is fully or partially managed by a variant of (a) blockchain(s) of 2017.

Cryptoeconomics – Study of economic intelligence and agents in a real technology framework such as a blockchain.

Real Technology Framework – Applied blockchain(s) technology that has an impact on the GDP and GNP of a community, normally countries.

Economic Intelligence – Self-aware Intelligence that is able to serve in the role of the invisible hand. Not exclusive to software, this means that an Economic Intelligence could be used to describe V. Buterin [co-developer of Ethereum, a cryptocurrency/smart contract] who fulfills the role of an intervening intelligence An Economic Intelligence can be thought of as a partial invisible hand, for which it fulfills certain roles within the Real Technology Framework.

This definition is not exhaustive but provides for a future reduction in information asymmetry. There is a need to incorporate current consensus in both economics and computer science.

“Ideas shape the course of history.”

– John Maynard Keynes

I propose however that cryptocurrency is the tip of the iceberg but provides a platform for a much broader adoption for Blockchain as a Service (BaaS). Satoshi’s paper of 2008 decentralized ledger is the catalyst for a full implementation at the society level.

Simply put, BaaS can be a tool for which we utilize the decentralized open ledger concept when we network. Different circumstances such as day to day business activities, person to person interaction, and business to consumer interaction. Can all be incorporated into BaaS.

BaaS, however, differs from current macro and microeconomic equilibriums in that its existence and implement poses a natural downward pressure on asymmetric information.

Each community eg. Zurich which has plans to adopt Ethereum for ID verification reduces information asymmetry in that specific slice of misinformation. Criminals are hypothesized to not be able to forge false Swiss national IDs which are simply “wallet addresses”s subjected to open ledge confirmations [this reiterates the importance of the other end of cryptoeconomics which is the advancement in Blockchain as a concept]

Cryptoeconomics I hope exists to reduce information asymmetry and fully implement blockchain as an identity. Advancements in machine learning and computer sciences can give rise to an improved community (that is beyond the scope of cryptoeconomics) however it would be myopic to limit cryptoeconomics to micro details and variable sum games.

There have been two variants of the word namely, Cryptoeconomics and Cryptoeconomics. Why the latter?

I am not against the use of cryptoeconomics however I refer to the use of macroeconomics and microeconomics as an example. It is my view that as a new sub-field or even as a theory in development. It is responsible to adhere to current consensus for which professionals face as little barriers when learning.